Proposed Regs. Provide Rules for Whistleblower Awards

Published December 17, 2012

The IRS issued proposed regulations for whistleblower awards under Secs. 7623(a) and (b), as well as rules governing the disclosure of return information under Sec. 6103(h) to pursue these claims (REG-141066-09). The proposed regulations provide general rules for submitting information to the IRS, definitions of key terms, rules for administrative proceedings, and criteria for determining the size of an award.

Sec. 7623(a) permits the IRS to pay awards to whistleblowers at its discretion. Any amount payable under Sec. 7623(a) is paid from the proceeds of amounts collected by reason of the information provided, and any amount collected is available for these discretionary payments.

Sec. 7623(b) provides that qualifying individuals will receive an award of at least 15%, but not more than 30%, of the collected proceeds resulting from the action that the IRS proceeded on based on the information the whistleblower provided to the IRS.

Prop. Regs. Sec. 301.7623-1 provides the general rules for submitting information on underpayments of tax or violations of tax laws and filing claims for awards. This section lists the information required to be submitted to file the claim and the people who are ineligible to claim an award. The list of ineligible claimants includes Treasury Department employees, government officials, and individuals who are required by law to disclose the information. In the preamble to the regulations, the IRS specifically requests comments on whether others should be added to the list of ineligible claimants, and whether electronic filings should be permitted, and if so, how that should be accomplished.

Prop. Regs. Sec. 301.7623-2 defines key terms, including “administrative” and “judicial” actions, “proceeds based on” information provided by an individual, “related action,” “collected proceeds,” “criminal fines” (which are excluded from collected proceeds), and “computation of collected proceeds.” The IRS is requesting comments on each of the key terms, as well as whether and how the IRS could determine any amount of collected proceeds that arise as a result of a taxpayer’s use of tax attributes such as net operating losses.

Prop. Regs. Sec. 301.7623-3 contains the rules for administrative proceedings and administrative appeals of awards under Sec. 7623(a) and Sec. 7623(b). The administrative appeal for Sec. 7623(a) is generally limited to a letter the claimant can write if he or she disagrees with the IRS’s determination letter; the administrative review process is much more thorough for Sec. 7623(b) awards. The IRS is requesting comments about whether claimants should be given additional opportunities to participate in administrative proceedings, whether additional safeguards should be adopted to further protect taxpayer return information in whistleblower administrative proceedings, and whether starting a whistleblower administrative proceeding before a final determination of tax in the underlying taxpayer action provides a meaningful benefit for whistleblowers.

Prop. Regs. Sec. 301.7623-4 generally contains the criteria the IRS will apply in determining the size of the award under Sec. 7623, which is based in part on how substantial the claimant’s contribution was in obtaining the collected proceeds and whether the claimant was involved in the act that gave rise to the proceeds. The IRS requests comments on the efficacy of the fixed percentage approach in the regulations; whether there are additional positive factors, negative factors, or planning and initiating factors useful to determine the amount of awards; the threshold determination of whether a whistleblower planned and initiated an underlying act; whether the IRS should determine and pay multiple awards in cases in which two or more independent claims relate to the same collected proceeds, or only reward the first individual to come forward; and how to apply the eligible affiliated claimant rule.

Prop Regs. Sec. 301.6103(h)(4)-1 authorizes Whistleblower Office employees to disclose return information to the extent necessary to conduct whistleblower administrative proceedings. The regulations provide, among other things, that the Whistleblower Office should use confidentiality agreements to protect from unauthorized disclosures of information disclosed to claimants. The IRS requests comments on whether the proposals strike an appropriate balance between minimizing possible redisclosures of confidential return information and providing meaningful opportunities for claimants to participate in the administrative processing of their claims.

The IRS will consider all written or electronic comments received before it issues final regulations. A public hearing will be scheduled only if one is requested by someone when he or she submits written comments. The deadline for comments or requests for a hearing is Feb. 19, 2013.

The regulations are proposed to apply to information submitted on or after the date the final regulations are published or to claims that are open on that date. However, Prop. Regs. Sec. 301.7623-4 is not proposed to apply to claims under Sec. 7623(a) that are open on the date the final regulations are published, so that the IRS can continue to apply consistent rules to open claims under Sec. 7623(a). The IRS also requested comments on these proposed effective dates.